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You may not realize it, but the choices you make when investing
assets in your 401(k) plan may be influenced by the selections
your co-workers are making.

A new study by the Pension Research Council at the University of
Pennsylvania's Wharton School found that 401(k) participants
are influenced by their co-workers when they make equity
investments.

Individuals are likely to increase the portion of their 401(k)
that's allocated to stocks when their peers earn higher equity
returns, and they often pull money out of the stock market when
peers experience stock market losses.

"People may use their co-workers' asset returns to update their
own beliefs about the equity market," says Timothy Lu, an
assistant professor at Peking University HSBC Business School and author of the report.

"People generally care about not only their absolute wealth, but
also their wealth relative to their peers. Hence, they may make
asset allocation adjustments when their peers have earned
abnormal returns on equity."

Positive peer returns have a much higher impact on an
individual's 401(k) choices than negative returns, the study of
173,923 randomly selected Vanguard Group 401(k) participants
between January 2005 to December 2009 found.

"People enjoy talking about their successful stories, but would
rather remain silent when they are not doing so well," says Lu.
"Communication about 401(k) investments is likely to be biased
toward positive returns."

Individual 401(k) participants react even more strongly when
their co-workers have significant positive or negative returns. A
retirement saver is likely to increase his equity ratio by 1.4
percentage points when his co-worker's equity returns exceed 4
percent, Lu found. When peers' investments lose more than 4
percent, the saver decreases the equity portion of his portfolio
by 0.9 percentage points.

"When your co-workers earn above-average returns on their pension
investments, this has a spillover effect on your own pension
investment selections," says Olivia Mitchell, director of the
Boettner Center for Pensions and Retirement Research at the
University of Pennsylvania.

"When participants in 401(k) plans make pension investment
decisions, they tend to be influenced by what their co-workers
are doing, rather than being directed simply by the principles of
risk diversification and related concepts."

Earlier research has shown that your colleagues may also
influence whether you sign up for the 401(k) plan or attend a
401(k) education seminar. One study offered a randomly selected
subset of employees who were not yet enrolled in their
company'sretirement account $20 to attend a benefits information
fair.

Among those who were offered the financial incentive, 28 percent
attended, while only 5 percent of employees who worked in
departments in which no one was offered a monetary reward
attended. Interestingly, employees who were not offered a
financial incentive but who worked in the same department as
someone who was offered a reward had a 15.1 percent attendance
rate for the seminar, perhaps because their peers receiving the
reward influenced them to attend.

"An employee who sees colleagues receiving the inducement letter
might be reminded of the fair and be led to think that this is an
important event worth rewarding employees for attending and thus
might decide to attend herself," write Esther Duflo of the
Massachusetts Institute of Technology and Emmanuel Saez of the
University of California—Berkeley in the 2003 study of 6,200
university staff employees. "Individuals who receive the letter
and decide to go to the fair might ask their colleagues to join
them."

A year later, the retirement-plan enrollment rates in departments
in which some employees received the financial incentive were
about 1.25 percentage points higher than in departments in which
no reward was offered for attendance.

But the sign-up rate was not significantly higher among people
who received the reward themselves than among those who worked in
a department where someone else received the $20 incentive.

"Social-network effects definitely caused some people to take
steps which ultimately led them to change their tax-deferred
account participation decision," the researchers found.